Stable Value Funds: Benefits, Risks & How They Work

A stable value fund is designed so it is "impossible" for an investor to lose money. The funds were first offered through 401(k) plans, but they are now an option for IRA accounts as well. The reason the funds can guarantee a constant value is because the majority of them use insurance wraps to hedge against loss. 

Insurance Wrap Pros

With an insurance wrap, the fund contracts with an insurance company that promises to pay the fund if the value of the investments falls below a certain level. The insurance company agrees to this because, on the flip side, the fund promises to pay the company if the gains are above a certain level. The result is, ideally, a fairly consistent value for the fund.

Insurance Wrap Cons

Unfortunately, the market for both investments and insurance companies is not "ideal." In the late 1980s, a number of insurance companies were involved in risky investment deals, and they went under, rendering the stable value funds worthless. This happened again in the last 2000s, and new regulation developed regarding how insurance companies could interact with investment companies. If the contract moves into default, your fund that was fine yesterday, could be a junk fund today.